American Airlines Group Inc. — Form 10-Q Summary
Business context and reporting period
Combined quarterly report for American Airlines Group Inc. and wholly owned subsidiary American Airlines, Inc., covering the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The group operated nearly 6,700 daily flights to approximately 350 destinations in more than 50 countries and carried approximately 52 million passengers in the second quarter.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Operating revenue | $11.105 billion | $10.363 billion | +7.2% |
| Operating income | $1.535 billion | $1.751 billion | -12.3% |
| Operating margin | 13.8% | 16.9% | -3.1 pts |
| Pre-tax income | $1.291 billion | $1.493 billion | -13.5% |
| Net income | $803 million | $950 million | -15.5% |
| Diluted EPS | $1.63 | $1.68 | -3.0% |
| Net margin | 7.2% | 9.2% | -2.0 pts |
For the six months ended June 30, 2017, revenue was $20.729 billion, up 4.7%; operating income was $2.136 billion, down 30.8%; pre-tax income was $1.656 billion, down 36.6%; and net income was $1.037 billion, down 37.2%. Diluted EPS was $2.07 versus $2.80.
- Q2 passenger revenue increased 6.5% to $9.582 billion, supported by a 4.3% increase in consolidated passenger yield. Total revenue per available seat mile rose 5.7% to 15.48 cents.
- Q2 operating expenses increased 11.1% to $9.570 billion. Fuel expense increased 14.9% to $1.510 billion, while salaries, wages and benefits increased 12.5% to $3.003 billion.
- Mainline CASM increased 10.6% to 12.51 cents. Mainline CASM excluding special items and fuel increased 7.6% to 9.82 cents.
- Six-month operating cash flow was $3.938 billion, down from $4.833 billion in 2016. Capital expenditures and aircraft purchase deposits were $3.194 billion.
- At June 30, 2017, cash was $386 million, short-term investments were $6.500 billion and restricted cash and short-term investments were $554 million.
- Total available liquidity was approximately $9.3 billion, consisting of $6.9 billion of unrestricted cash and investments and $2.425 billion of undrawn revolving credit facilities.
- Long-term debt and capital lease obligations totaled $25.098 billion, including $2.334 billion of current maturities. The company reported $22.525 billion of debt and capital leases net of current maturities.
- Q2 income tax provision was $488 million and was substantially non-cash because of the use of net operating loss carryforwards.
Material changes versus the prior comparable period
- Revenue growth did not offset cost inflation. Higher fuel prices, labor costs and other operating expenses reduced operating and net margins.
- The average consolidated fuel price increased 14.7% in Q2 to $1.63 per gallon; the company had no fuel-hedging contracts and therefore remained fully exposed to fuel-price changes.
- Mid-contract pay adjustments for pilots and flight attendants, together with maintenance and fleet-service wage increases, materially increased labor expense. Management estimated an additional salary and benefits expense of approximately $230 million in 2017 and $350 million in 2018 and 2019 from the pilot and flight-attendant adjustments.
- Q2 operating special items increased to $203 million from $65 million, including fleet restructuring, merger integration, mark-to-market adjustments and $45 million of labor contract expenses. Total pre-tax special items were $205 million versus $101 million.
- The company repurchased 10.0 million shares for $450 million in Q2 and 21.7 million shares for $962 million in the first six months. Since July 2014, it had repurchased 250.0 million shares for $10.0 billion.
- Aircraft financing continued: the company issued approximately $1.1 billion of EETCs and borrowed $533 million under aircraft financing arrangements during the first six months. It also repriced term loans to reduce applicable interest-rate margins.
- Fleet renewal and capital spending continued, with 42 aircraft delivered during the first six months, while the company had commitments for 257 additional aircraft and approximately $15.693 billion of aircraft and engine purchase commitments.
Guidance, outlook, commentary and risks
- Management stated that its current plan was to maintain minimum total available liquidity of $7.0 billion; liquidity at June 30, 2017 was well above that level.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the full retrospective method. It expects a material increase in the recorded AAdvantage mileage-credit liability and reclassification of certain ancillary fees into passenger revenue.
- The company expects the new lease standard to materially affect the balance sheet through recognition of right-of-use assets and lease liabilities, principally for operating leases.
- Major risks include fuel-price volatility, high leverage, interest-rate exposure, the need to finance aircraft purchases, pension funding, labor disruptions and rising labor costs, intense airline competition, pilot shortages, operational or technology disruptions, cybersecurity events, regulatory changes, foreign-exchange volatility and adverse economic or geopolitical conditions.
- As of June 30, 2017, the company was in compliance with applicable collateral coverage tests. Credit ratings were BB- from S&P, BB- from Fitch and Ba3 from Moody’s, and a downgrade could increase borrowing costs.
- Pending matters included DOJ investigations and approximately 100 putative class-action lawsuits concerning alleged airline capacity coordination, a DOJ inquiry concerning certain USPS mail contracts, and litigation regarding postemployment benefits and the US Airways merger. Outcomes and potential effects could be material but were not determinable from the filing.
- Republic Airways emerged from Chapter 11 during Q2. American restructured its contractual relationship and received an approximate 25% equity interest in Republic.
Most important facts for investors to verify
- Whether revenue and yield growth can continue to offset fuel, labor, maintenance and fleet-related cost increases.
- The sustainability of margins and cash generation after the 2017 labor-rate increases and under varying fuel-price scenarios.
- Debt maturities, aircraft financing needs, collateral requirements and the effect of interest-rate or credit-rating changes.
- The company’s ability to fund approximately $12.0 billion of planned aircraft purchase expenditures for 2017 through 2021 while maintaining its liquidity target.
- The eventual accounting effects of the revenue, lease and retirement-benefit standards, particularly on loyalty-program liabilities and reported margins.
- Potential financial, operational or reputational effects of the DOJ investigations, antitrust litigation, postemployment-benefit proceedings and other legal matters.
- Whether share repurchases and dividends remain appropriate given capital commitments, pension obligations and leverage.